China or the World? a Financial Reporting Strategy for Hong Kong’s Capital Markets

1. In your view, did the Hong Kong Stock Exchange make the right move in allowing Chinese companies to report using Chinese GAAP?

Our group has reached a consensus that the move of HKEx is right. While we are aware of the drawback, such as the dual-standards reducing the comparability of financial reports and, in some cases, misleading the less accounting-savvy investors, we believe the move does more good than harm.

First, the increasing competitive landscape of capital-markets/stock-exchanges both within China and worldwide makes this move necessary. That HKEx requires Chinese-based companies to report using HKFRS would be a very similar case to New York Stock Exchange requiring foreign companies to conform to US GAAP under Sarbanes-Oxley requirements, which, since its passage in 2002, has dissuaded quite some foreign companies from seeking listings in the U.S. If HKEx insisted all Chinese-based companies to conform to HKFRS, it may lose its competitiveness to other stock exchanges such as Shanghai Stock Exchange and Singapore Stock Exchange, who have been increasingly competitive.

Second, the fact that Chinese GAAP has been converging to IFRS and the differences are diminishing means the dual-standards is in fact partial. With recognized convergence of Mainland Accounting Standards with IFRS and with the large number of Mainland companies listed in Hong Kong, there is no reasonable justification for HKEx not to recognize Mainland accounting standards as one of its accepted accounting standards. In fact, HKEx is not the only stock exchange that accepts Chinese GAAP. Other major stock exchanges such as the London Stock Exchange, New York Stock Exchange, Australian Stock Exchange, Toronto Stock Exchange, and stock exchanges in the European Union (EU) accept IFRS or other national accounting standards and have had similar arrangements in place before Hong Kong.

Third, Chinese GAAP is practically more suitable for Chinese reality. For instance, fair value...